HILTON, the Ladbrokes turf accountant and upmarket hotelier, is firing on all cylinders. The 50 per cent expansion in profits on the betting side stole yesterday’s show of interim results. But the 20 per cent increase in operating profits from hotel activities was no less impressive. Helped by strong flows of cash into the business, debt levels fell and interest payments dropped in corresponding fashion.
However, the resulting 71 per cent increase in pre-tax profits singularly failed to generate any share price excitement yesterday. Part of the reason for this is that Hilton did no more than was expected. It is widely known that the introduction of fixed-odds betting terminals into betting shops has gone down a storm with customers. It comes as little surprise to learn that Ladbrokes had a good six months at the races, too. The Cheltenham National Hunt festival was a nightmare for punters.
Ladbrokes’ lucky streak continued with Greece coming in as unlikely winners of the Euro 2004 football championship. But that is hardly news. At the same time you did not have to be a clairvoyant to have predicted prior to yesterday that Hilton’s hotels would produce an impressive leap in profits. The whole market was depressed in the first six months of 2004 by the Iraqi hostilities and the Sars virus, and the industrywide recovery in demand among business and leisure clients earlier this year was readily observable.
Hilton shares have responded to the slews of emerging good news by gaily doubling in value during the past 12 months and being propelled to their highest level in nearly five years. The question holding shares back now, however, centres on the sustainability of the profit growth. Betting and hotels are both notoriously cyclical and the fear is that yesterday’s figures represent some sort of peak from which the only way is down.
There is little doubt that the rate of growth in profits at Hilton will slow. It is also safe to assume that they may turn down at some point in the future although increasing consumer acceptance of betting may make that bigger contributor to group profitability less susceptible to economic downturn than is often assumed. Shares, which give a yield of 3.6 per cent, are valued in line with the market average. They are well worth holding.
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Tomkins
TOMKINS, the automotive, engineering and construction industry components supplier, presented investors with further evidence yesterday that the reformation being undertaken by Jim Nicol, the chief executive, since February 2002, is bearing fruit. The 7 per cent improvement in pre-tax profits may suggest that the company is making steady rather than truly impressive progress. But adverse currency movements held the numbers back. And although a reduction in one-off charges brightened the picture, it is safe to assume that like-for-like profits grew at double-digit percentage rates.
A lot of the growth came as Tomkins drew benefit from cost cutting. However, the company also presented sound evidence yesterday that the top line is moving forward. The headline turnover numbers were as flat as a pancake but, if you ignore the currency movements, sales advanced by 7 per cent.
Tomkins faces challenges when it comes to raw material cost increases. It may have to swallow good chunks of the rises in steel and aluminium prices — particularly where it deals with the ultra cost-conscious motor manufacturers. But industrial demand in the Far East and construction activity in the US mean that Tomkins is well placed to deliver sales growth at maintained overall margins of profitability in at least the foreseeable future.
It may be imagined that the typical Tomkins customer is unadventurous and that all suppliers face a difficult job to invigorate business volumes. But Tomkins’s determination to focus on new product development gives it a good chance of surprising investors on the upside.
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The odd acquisition and continued focus on operating efficiency will provide further assistance. Tomkins’s strong cash flow characteristics and healthy balance sheet — gearing sits at 35 per cent — add to the attractions. Best of all, shares in Tomkins give a reliable 5 per cent yield at current levels. This makes the stock look undervalued. Buy.
Invensys
INVESTORS in Invensys, the electronics engineer, have grown used, sadly, to seeing their company deeply in the red. So yesterday’s £368 million bottom-line loss barely raised an eyebrow. Of course the bulk of the losses came as Invensys was obliged to write off another lorry-load of goodwill in businesses sold or closed.
As non-cash items it is easy to ignore them. Moreover they serve to confirm the extent of value already destroyed and already reflected in the share price. Shares are well and truly marooned, however. At 15p, the price compares with a 340p peak touched five years ago and a 113p average since 1999. The 15p price also compares unfavourably with 21½p average of the past 12 months.
Given the progress made selling businesses and reduced the once-towering debt burden, many will have hoped to see share price progress by this stage. Investors that bought shares in the spring share issue — priced, coincidentally, at 21½p — will be especially miffed.
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Operating results posted yesterday were a little better than expected. The company also offered encouraging news on debt. The burden is down to £629 million compared with £3.5 billion at its peak. Meanwhile the accompanying comments from Rick Haythornthwaite, the chief executive, were positive.
Yet debt remains high and pension obligations weigh. Harder evidence of profit progress is needed before shares can be bought with confidence. Avoid.